Friend of the Farmer

When I spend too much time thinking about the stock market, I make it a habit to put on one of my What Would Womack Do? T-shirts and contemplate the market from my farmer friend's point of view. Womack, you may recall, is the farmer (introduced by John Train in 1978) who never lost money in the stock market. He used a simple formula of buying low in bad markets and selling high a few years later when thing improved. In the article, the narrator says that one of the most important things he learned from Womack was that if you can buy a stock at the bottom end of its price range, this would forgive a lot of other investing mistakes one might make

This morning, I ran a screen looking for stocks that were in the bottom 25% of their price range for the past three years. As you can imagine, it was not a very long list. Global markets have surfed a wave of liquidity for the past few years and most are flirting with highs right now. There are not a lot of what you might call Womackian opportunities.

A lot of Brazilian equities are in the bottom of their three-year price range and many of them are flirting with new lows. The Brazilian market is one of the very few places on the planet that might be close to maximum pessimism. Brazil's weak economy and high inflation reminds me very much of the U.S. in the 1970.

Government interference is weighing on stocks such as Petrobras (PBR) and Companhia Paranaense de Energia (ELP), but the stocks are very cheap. Both trade for just a fraction of tangible book value. It may take Brazil five years or so to emerge from the morass (as it did the U.S.), but I expect the reruns on equities bought today to be the same as it was here. Buying into the bad markets of the mid-1970s worked out very well.

Commodity related stocks are still having a tough go of it and are trading at the low end of their trading range. Cliffs Natural Resources (CLF) is struggling to work though global excess iron ore inventories and is selling for just 60% of book value at today's price. I am sure it will be a bumpy ride, but I think the stock will be a lot higher in five years than it is today. The same can be said for commodity supply chain concern MFC Industrial (MIL), which is also selling for just 60% of book. As a bonus, you get paid by these stocks, as both are currently yielding over 3%.

There are a lot of energy related names on the list as well. Swift Energy (SWY) is seeing slower progress in improving its mix of oil, liquids and natural gas and the market has crushed the shares. It now trades for about 25% of its 2011 highs and at just about 40% of book value. Similar problems have weighed on the price of Penn West Petroleum (PWE) and its shares are trading at about one-third of the highs at just 50% of book value right now. Penn West also pays a nice dividend and is yielding 6.6%. Oil and gas demand will increase in the years ahead (no matter how much we spend on alternative energy) and these shares should be a lot higher in a few years that they are today.

When I ignore all the noise and chatter and just think about what my wildly profitable farmer friend would do, one thing becomes obvious: Womack would be paying a lot more attention to his farming operations that the stock market right now. In all likelihood, he would be pretty close to driving into town and selling the holdings he bought back in 2009. While the stock market is not egregiously over priced at current levels, it is not cheap either. We do not see the type of euphoria that would send him looking for the truck keys just yet, but there are hints of it in the air.